An Unexpected Spin For Investors
Aaron’s, Inc (NYSE: AAN) reported earnings this morning to great fanfare (if little heard). The company delivered better than expected results and announced a strategic move sure to boost shareholder value. The company has decided to spin it’s two primary segments into separate publicly-traded companies. Basically, the company believes the sum of the parts is worth more than the whole and eager to unlock that value for investors.
On a segment basis, Progressive Leasing accounts for just over 50% of annual revenues while Aaron’s Business accounts for a little less. The deal is tax-free to shareholders and expected to close by the end of the year. Benefits include improved focus, leadership positions within the respective industries, positive free-cash-flow, and well-capitalized balance sheets. The free-cash-flow and well-capitalized balance sheets are important. Aaron’s is a dividend growth stock with a very high expectation of future increases.
The Results, Better Than Expected (And I’m Not Surprised)
Aaron’s was expected to deliver a decent quarter but not quite as decent as it did. The idea that stay-at-home trends would equate to higher traffic/sales at a furniture rent-to-own company played out in spades. On the top line, revenue grew 6.4% on a YOY basis to outpace consensus by over 400 basis points. The strength in revenue carried through to the bottom line, aided by company efficiencies, producing adj EPS of $1.18 and GAAP EPS of $1.01. Adjusted EPS beat by $0.36 while GAAP beat by a quarter.
On a segment basis, there is a bit of disparity although results are positive for both. The Aaron’s segment saw its revenue rise only 1.4% on a same-store basis versus growth at Progressive Leasing of 14.2%.
“Progressive's results were favorably impacted by improving invoice growth throughout the quarter, operating expense management and strong customer payment activity. Similarly, Aaron's Business second-quarter financial strength is the result of strong customer payment activity, lower write-offs, and operating expense management. We continue to maintain a conservatively capitalized balance sheet and have experienced strong year-to-date operating cash flow.”
What this means for investors is twofold. First and foremost, Aaron’s, Inc has proven to be pandemic proof and well-positioned for future growth. Second, the analysts have once again proven to be too conservative. The consensus targets for full-year results are far too low and that means upwardly revised price targets if not upgrades to the stock.
Aaron’s, Inc (NYSE: AAN) An Ironclad Dividend And Fortress Balance Sheet
Aaron’s is surprising for another reason, its balance sheet. The company has one of the strongest balance sheets I’ve seen and that is saying a lot. Regarding its metrics, debt is very low, cash is very high, free-cash-flow is outrageously high, as is coverage. In terms of total debt to equity, that ratio is running about 70%; the debt to free-cash-flow is closer to 25% and coverage is close to 25X. Bottom line, this company is well-capitalized with nothing to fear.
What this means for the dividend is safety. The only problem is the yield is so low as to be nearly non-existent, about 0.25%. The upshot is that Aaron’s is a dividend grower verging on Aristocrat status so there is an expectation of future increases. Based on the 5-year CAGR the next increase could substantial, at least low-double digits if not higher. Using today’s earnings metrics the payout ratio is under 5% so there really isn’t any reason for them not too, other than caution.
The Technical Outlook: The Market Like’s Aaron’s, Inc (NYSE: AAN)
Aaron’s results and plans to split are a game-changer for this stock. The shares made a solid rebound from the March low but, until today, that rebound had been hampered by uncertainty. The uncertainty is gone and with it a new certainty; the market want’s own this stock. Today’s news has share prices up more than 13% to trade at a new post-correction high. Price action is breaking above previous resistance at the bottom of the February gap lower confirming the last month of consolidation as a bullish flag. With that in mind, today’s surge is only the beginning, investors can expect up to another $30 of net upside and possibly more by the end of the year.
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